HOW BIG GOVERNMENT GETS THAT WAY It takes over new turf in time of crisis, then hangs on to much of it after the crisis is over.

By DAVID R. HENDERSON DAVID R. HENDERSON, formerly a senior staff economist with the Council of Economic Advisers, now teaches in Monterey, California.

August 31, 1987

(FORTUNE Magazine) – When I was a summer intern with the Council of Economic Advisers in 1973, I worked in the Old Executive Office Building next to the White House. Being a
curious type, I looked into the building's history and learned that early in the century it had housed three Cabinet departments at the same time -- State, War, and Navy. Comparing
the government's size back then with its size in 1973, I was astounded at how enormously it had grown. What happened to make government grow so big in ''the land of the free''? In
Crisis and Leviathan (Oxford University Press, $24.95), Robert Higgs, professor of political economy at Lafayette College in Pennsylvania, presents an answer. The great generator of
government growth, he argues, was crisis. He shows how three crises -- World War I, the Great Depression, and World War II -- gave federal, state, and local governments more power
over their citizens. During World War I, for example, the federal government drafted almost three million young men, nationalized the railroads and the telephone lines, requisitioned
all American ships over 2,500 tons, regulated various food prices, and imposed punitive taxes on high incomes. Some local governments, encouraged by federal authorities, put controls
on rents. Even Prohibition, which most of us thought began with the Volstead Act of 1919, actually started with the Lever Act of 1917. This statute gave the government far-reaching
powers to control the production and distribution of food and fuel. Among many other things, it stipulated that ''no foods, fruits, food materials, or feeds shall be used in the
production of distilled spirits for beverage purposes.'' The Espionage Act of the same year was used to jail people who made antiwar speeches, mailed antidraft pamphlets, or
questioned in print the constitutionality of the draft. Higgs's idea that government gains powers during a crisis may seem obvious, but that is because we are conditioned by the
period we live in. As Higgs shows, things were not always so. He presents a fascinating account of Grover Cleveland's second Administration, 1893 to 1897, which was beset by crisis
but did not respond by taking on more power. In 1894, for example, the unemployment rate reached 18%, and Cleveland was pressured to provide relief with expanded public works
programs. He resisted, and so did many members of Congress. Senator James Berry of Arkansas, voicing the dominant mind-set, declared that ''it is not the purpose of this Government to
give work to individuals throughout the United States by appropriating money which belongs to other people and does not belong to the Senate.'' Higgs notes that Cleveland had the
support of the majority of his countrymen. Back then most people did not hold the idea, almost universal today, that because a serious problem exists, the government should ''do
something.'' Now comes the second part of Higgs's argument: Once the crisis has ended, the government loses some power but never retreats to its precrisis size. After World War I, the
federal government returned the railroads to their owners, but the Transportation Act of 1920 gave the Interstate Commerce Commission control over rates and even over the
construction, use, and abandonment of facilities. The top federal tax rate on personal income, which in 1913-15 had been 7% and which reached 77% during the war, never fell below 24%
afterward. Similarly with the Great Depression and with World War II. During the Depression, the government fixed prices of agricultural commodities, extensively regulated securities
markets, intervened in union-management relations, produced and sold electric power, and instituted the minimum wage, unemployment insurance, and Social Security. It still does all
these things. During World War II, the government imposed controls on wages, prices, and rents; rationed food, tires, gasoline, and shoes; conscripted millions of men into the
military; and introduced withholding of income taxes. Some interventions were scaled back after the war, but others remained. Tax withholding is still with us. Although rent control
was eliminated in most cities, it lingers on in some, including New York. This ratchet growth of government has been noted by other economists who have studied the matter, such as
Northwestern University's Jonathan Hughes. But why doesn't the government shrink to its pre-crisis size after the crisis has ended? Higgs's answer: changed perceptions. Once the
government has used certain powers, he argues, people see that their other freedoms are not as endangered as opponents of the measures had led them to fear. Also, Higgs continues,
people learn that while government control eliminates some opportunities, it creates others. A good recent example is Medicare. The American Medical Association opposed Medicare at
first but now approves of it, partly because it increases demand for doctors' services. Another reason government never returns to its old size and scope, writes Higgs, is that the
Supreme Court often affirms newfound powers. Then the gates are open for future exercise of those powers. A momentous example is the Supreme Court's ruling in 1918 that the draft did
not violate the 13th Amendment's prohibition of involuntary servitude. Higgs quotes a legal scholar's statement in 1969 that the 1918 draft-law cases have ''been cited repeatedly as
determining that question once and for all time.'' The next time Congress imposed the draft, in 1940, we weren't even at war. And after World War II ended, the draft remained, with a
hiatus of only one year, until 1973. Present-day opponents of rent control can look back with blame to a Supreme Court decision in 1921. The court held that rent control was not an
unconstitutional taking of private property, a ruling that would have been inconceivable before World War I. A MORE recent example of a ruling that lowered a barrier to future
government interventions was the Supreme Court's 1944 decision on indirect sanctions, which Higgs defines as ''the imposition of a penalty by a governmental agent other than the one
legislatively authorized to penalize the specific breach of law or regulation.'' Such sanctions were first used widely in World War I. During World War II they were the government's
main weapon for controlling prices, raw materials, and manpower. In that 1944 case, Steuart v. Bowles, the Office of Price Administration had suspended a fuel-oil dealer's access to
supplies because he violated rationing regulations. The law authorizing the controls had given the OPA no such power, but the Court found such sanctions to be constitutional. They are
still around. Higgs notes that Jimmy Carter's wage-price guidelines effort ''relied entirely on indirect sanctions.'' Ending on a somber note, Higgs argues that a reduction in the
government's power is highly unlikely. He may be right, but he does not justify his extreme pessimism. Indeed, his book provides some basis for cautious optimism. He notes, but
attaches little weight to, the deregulation of transportation, communications, banking, and oil in the past ten years. And he dismisses what in his own view is the most fundamental
retrenchment of government power in our time -- the abolition of the draft in 1973. Richard Nixon, Higgs argues, did away with the draft for reasons of political expediency rather
than out of any regard for individual rights. Higgs is probably correct about Nixon's motives. But so what? If politicians start offering us additional freedom because their political
self-interest dictates it, isn't that a refreshing reversal? Like Higgs, I would prefer to see our leaders whittle down the government on principle. But I'll take freedom any way I
can get it.